:00:10. > :00:15.That is the summary. Now on BBC News, it is time for HardTalk.
:00:15. > :00:20.It is South America's boom economy. Growing at a rate which almost
:00:20. > :00:27.echos that of China. That may not be surprising when you realise the
:00:27. > :00:31.country is Chile, and its key commodity is copper. China the
:00:31. > :00:39.biggest importer - a perfect marriage. Except that China is
:00:39. > :00:44.losing its ap piet and Chile risks feeling the effect. How will it
:00:44. > :00:50.cope? That depends on Chilean Finance Minister, Felipe Larrain.
:00:50. > :00:54.Students are taking to the streets in droves to protest the cost of
:00:54. > :00:58.education. He is trying to attract investigators.
:00:58. > :01:08.Major power generation schemes are thwarted. Is Chile's economy
:01:08. > :01:20.
:01:20. > :01:25.Welcome to Hardtalk, Felipe Larrain. What do you think explains Chile's
:01:25. > :01:29.economic success? Well, it is a country - a country that works, an
:01:29. > :01:35.economy that works. Predictable, stable policies, institutions which
:01:35. > :01:39.have been in place for a long time, and that, you know, foreign
:01:39. > :01:42.investors can look at them and say, "I can trust this country." This is
:01:42. > :01:47.why in the middle of an international recession in the
:01:47. > :01:53.first half of this year, we attracted over $12 billion of
:01:53. > :02:02.foreign direct investment, all in the first semester. It increased 0%.
:02:02. > :02:07.This year we will have a record foreign investment into Chile. The
:02:07. > :02:12.economy will keep moving but we will decelerate. We have said this.
:02:12. > :02:16.The deceleration will be gradual. We won't be losing jobs but
:02:16. > :02:19.creating jobs. Real wages are growing so people are feeling more
:02:19. > :02:24.purchasing power. The economy is moving, the consumption is doing
:02:24. > :02:29.well, investment is doing well. Exports are decelerating.
:02:29. > :02:33.Europe for us is 20% of our market. We are feeling a decline in exports
:02:33. > :02:38.to Europe, as you can imagine, with the situation that you have - the
:02:38. > :02:43.economic situation in Europe. lessons are there for Europe in how
:02:43. > :02:47.Chile has prepared itself for a slowdown? Let me point to one
:02:47. > :02:52.particular issue. There are many things, and they are lessons also
:02:52. > :02:57.that we can take from Europe. Among them, the integration that you have
:02:57. > :03:02.been able to have over since 1957, the Treaty of Rome, leading into
:03:02. > :03:05.the European Union. This is something where we are struggling
:03:05. > :03:12.to integrate more in a trade treaty, not just a single market, which
:03:12. > :03:17.have very far away from us. But there's one thing, and it is fiscal
:03:17. > :03:21.policy. Let me mention why. The common route behind the crisis that
:03:21. > :03:26.you find in almost all the countries that are struggling now
:03:26. > :03:30.is a policy that became fiscal policy that became unsustainable,
:03:30. > :03:34.high deficits, high levels of debt. The markets became nervous,
:03:34. > :03:38.interest rates increased. So, in order to finance the cost of
:03:38. > :03:43.government debt, you have to spend more and this becomes a vicious
:03:43. > :03:51.circle. In Chile, we have a very low level of debt. In fact, less
:03:51. > :03:55.than 0% of output is gross -- 80% of, but it is gross public debt. We
:03:55. > :03:58.have more foreign assets than foreign liabilities. It is a unique
:03:58. > :04:04.situation. There is a country in Europe which has it also, which is
:04:04. > :04:07.Sweden. If you have solid public finances, and here spending not
:04:07. > :04:12.according to your current revenue, but according to structural revenue,
:04:12. > :04:18.having a long-term view, so in the good times, you save, and you dis-
:04:18. > :04:22.save when a rainy day comes. you save abroad. You have sovereign
:04:22. > :04:27.wealth funds with any of your investments outside of Chile and
:04:27. > :04:31.South America. That is correct. is that? Why not keep your money at
:04:31. > :04:36.home? Well, because we would like to, in a way - what happens, if you
:04:36. > :04:39.face a downturn, and local economy, you know, goes down, then it
:04:39. > :04:43.cushions the effect that you have your investments abroad. Because
:04:43. > :04:48.they are not suffering. But, on the other hand, it also happens that
:04:48. > :04:52.the exchange rate moves. It acts - it increases the value of your
:04:52. > :04:56.foreign funds when things are going bad at home. So there is a mix of
:04:56. > :05:01.reasons. Also, the effect that these are very important funds in
:05:01. > :05:05.terms of volume. We have $20 billion for the size of our economy.
:05:06. > :05:10.That is, about 8% of our gross national product. In only two
:05:10. > :05:13.sovereign funds. We have government assets for another $14 billion, in
:05:13. > :05:19.addition to international reserves at the Central Bank of another $40
:05:19. > :05:21.billion. So altogether, Chile has more than $70 billion for a $270
:05:21. > :05:26.billion economy. Now you are going to need them, aren't you? The
:05:26. > :05:31.Central Bank is forecasting what growth somewhere between four and
:05:31. > :05:36.three quarter percent and five and a quarter percent compared to 6.5%
:05:36. > :05:41.in 2011. The economy is slowing. is, but at a very smooth pace. That
:05:41. > :05:47.is why I mentioned that Chile is among the five fastest-growing
:05:47. > :05:50.economies in the first half of the year, this year, with 5.4%. China
:05:50. > :05:54.is growing more. Indonesia is growing more, and, you know, a
:05:54. > :05:58.couple of other countries, and we are growing obpar with India.
:05:58. > :06:01.president made a promise. He said that he would aim for average
:06:02. > :06:05.growth during his term of 6%. That looks optimistic when he made the
:06:05. > :06:09.pledge at election time. It looks unachievable now, doesn't it?
:06:09. > :06:14.in the first two years we over- achieved that figure because in
:06:14. > :06:20.2010 and tweb 11, the average growth is -- 2011, the average
:06:20. > :06:24.growth is over 6%. Then we will be over 6%. Probably around this year
:06:24. > :06:29.we will be five and next year a little bit less. When you make your
:06:29. > :06:35.prediction, it is based on a world that is growing, not booming, but
:06:35. > :06:38.growing. You said in August he hoped that you would hope that you
:06:38. > :06:41.would surpass the previous growth. But circumstances are changing, and
:06:41. > :06:45.fast. One of the big changes has to be, presumably, you are dependent
:06:45. > :06:51.so far on China. That is correct. It is an interesting change. Over
:06:51. > :06:57.the last 10 years, China was not among the top 10 of our export
:06:57. > :07:03.partners. About 15 years ago. Now, it is No. 1. We export about almost
:07:03. > :07:09.a quarter of our exports go to China. We are trying to diversify
:07:09. > :07:18.away from copper into other exports. We also - European Union is 20% of
:07:18. > :07:24.our export, the US is 11%, Japan is 11%. Latin America is $15%. We have
:07:24. > :07:29.a diversified pace. This is not on your control. China is experiencing
:07:29. > :07:34.these problems. Imports down from China down 2.6%.
:07:34. > :07:38.The slowdown pressure is growing. Chinese factory output down 10%
:07:38. > :07:42.five months in a row. It will hit you and hard. What are you doing to
:07:42. > :07:46.prepare for that shift? Well, first of all, we have contingent
:07:46. > :07:49.programmes that we have developed over - it is in a shelf in the
:07:49. > :07:53.finest ministry. You pluck it off the shelf?
:07:53. > :07:57.pluck it off the shelf, you know. But we have not been in the need to
:07:57. > :08:00.use it. We hope we will use it. If we do, we have plans to protect
:08:00. > :08:05.employment first. We have plans to protect credit. The problem is that
:08:05. > :08:10.when you see in the financial markets, a credit squeeze, a credit
:08:10. > :08:15.crunch, that will will kill an economy's growth. What we do there
:08:15. > :08:18.- we had a minor issue last December. We acted in co-ordination
:08:19. > :08:22.with the Central Bank, and we averted the problem in a few days.
:08:22. > :08:25.The Central Bank governor has said that if he has to intervene again,
:08:25. > :08:31.it could be very expensive to repeat it. And the pressure is
:08:31. > :08:34.growing. Exporters are saying, "Look, the peso has surged 9.2%
:08:34. > :08:41.against the dollar." It is causing them problems.
:08:41. > :08:46.The fruit exporters, what, 5% of China's exporters of fresh fruit
:08:46. > :08:52.saying with a strong peso no-one wants to vaez in Chile. There are
:08:52. > :08:58.two types of intervention. One is to intervene to preserve liquidity
:08:58. > :09:02.in the market. The other is to maintain the exchange rate. You buy
:09:02. > :09:06.dollars. The Central Bank bought $12 billion, $1 billion per month.
:09:06. > :09:09.What happened after that, it accumulated $12 billion over the
:09:09. > :09:13.year. It is an expensive proposition to keep doing that. The
:09:13. > :09:18.Central Bank has not precluded doing it again, but it is not
:09:18. > :09:22.committed to doing it, because it has - you know, it is not like, you
:09:22. > :09:28.know, a win-win situation, the intervention. We are at the level
:09:28. > :09:31.of the finest ministry. We don't buy dollars. But when we do, we
:09:31. > :09:34.have a responsible moderate increase in government spending.
:09:34. > :09:40.And that supports the exchange rate. Supporting in the way that you know
:09:40. > :09:43.we wanted to depreciate, not to appreciate too much, so that when
:09:43. > :09:48.exchange, you appreciate everybody in the short term, feels happy.
:09:48. > :09:52.Tourists that go abroad, they can purchase more with their pesos, our
:09:52. > :09:57.local currency. But in the end, you squeeze exporters and you don't
:09:57. > :10:00.want to do that. And the question raised by the fruit exporters was
:10:00. > :10:05.investment. Let's speak with investment, because one of the big
:10:05. > :10:10.issues you face is investment in your infrastructure in Chile. A
:10:10. > :10:16.year ago, September 2011, there was a major power blackout. You had,
:10:16. > :10:20.what, nearly half of the population affected by this. Traffic lights
:10:20. > :10:24.not working. Mining production halted because there was no power.
:10:24. > :10:29.How big a wake-up call for Chile do you think that day was? Well, it
:10:29. > :10:34.was a wake-up call, but in a way, it was only a few hours and it has
:10:34. > :10:38.not repeated. We have... So far. We have a challenge in
:10:38. > :10:42.energy generation. We don't want to hide it. We, nrd to keep growing at
:10:42. > :10:49.the rate we are growing, 6%, we need to double generation capacity
:10:49. > :10:55.over the next decade. And this is something that with imply doing
:10:55. > :10:58.hydroelectric, thermal projects and renewable, alternative renewable
:10:58. > :11:03.energies. That is one of the things that we have discussed here with
:11:03. > :11:08.the UK businessmen. There is a lot of expertise in some, like, sea
:11:08. > :11:13.waves, wind and, you know, not hereers but similar energy are also
:11:13. > :11:17.component or the metrics in Chile. That all sounds fine. But then the
:11:17. > :11:22.investors do their research. And they discover that there is a
:11:22. > :11:26.problem, don't they? That is that when Chile has big projects
:11:26. > :11:32.proposed, they get blocked. We have had a series of them blocked just
:11:32. > :11:38.in the course of the summer of this year. You know, we had the one back
:11:38. > :11:46.in June that was going to be a major investment of coal-powered
:11:46. > :11:52.thermo electric plant rejected by your own environmental commission.
:11:52. > :11:54.In May, one in Patagonia, and blocked. Another one in August,
:11:54. > :11:58.again blocked because of environmental problems. Investors
:11:58. > :12:02.must be going on? Of course, that is a challenge. Part of the reason
:12:02. > :12:05.is that we have independent powers in Chile. We respect the judicial
:12:05. > :12:11.court. We need to go through the system, respect the environmental
:12:11. > :12:15.laws, we are trying to expedite the process. Spite of all you are
:12:15. > :12:20.saying, during this government we have had more approvals that - more
:12:20. > :12:23.than double the approvals that during the previous government.
:12:23. > :12:28.There are important projects. The latest one blocked by the Supreme
:12:28. > :12:32.Court. We need to work in the other projects. We have, you know, tens
:12:32. > :12:35.of projects, and very significant projects in the pipeline. Let me
:12:35. > :12:40.tell you one very important thing. This is not a problem for our
:12:40. > :12:43.government. The shortages, and a possible problem and bottlenecks
:12:43. > :12:50.will not happen occurring our period. We are working for the next
:12:50. > :12:57.government, for the Chilean people. This will happen - either a problem
:12:57. > :13:02.for 2015, 2016. One of your ministerial colleagues, the deputy
:13:02. > :13:07.Energy Minister has said that the increase in appeals is prohibiting
:13:07. > :13:11.investment. If you ask me what the main challenge, it is...
:13:11. > :13:17.You imported it, something like three quarters of all your energy
:13:17. > :13:21.needs? It is already dependent on external actors. Some of your
:13:21. > :13:28.regional neighbours have not been helpful. Argentina turns off the
:13:28. > :13:36.taps, complicated prices. We import 98% of our needs. We produce very
:13:36. > :13:39.little in Chile. 98% imported in oil and derivatives. In terms of
:13:39. > :13:44.electricity, we have done a couple of things. One in the far north of
:13:44. > :13:48.the country and the other in the centre and south. And they are
:13:48. > :13:55.appealing Congress to interconnect them, meaning to trade energy,
:13:55. > :13:58.generate in one part, trade it and send it to the other. A 600km line
:13:58. > :14:02.will be built to integrate both systems. All of these things depend
:14:02. > :14:06.on the outside world. Whether you're importing energy or
:14:06. > :14:14.persuading an investors to come and build the capacity for you. One of
:14:14. > :14:19.the biggest of those investors is the Brazilian billionaire Batista,
:14:19. > :14:23.who had a plant proposed rejected, the one I was talking about in
:14:23. > :14:29.August. He Tweet "to invest in Chile is becoming impossible. If
:14:29. > :14:35.they don't want us there, we will go, by, bye." My answer to that is
:14:35. > :14:39.look at the $12.3 billion foreign direct investment materialised in
:14:39. > :14:43.the country with a record number. This year we will be over 120
:14:43. > :14:50.million dollars... People who are respected figures. A
:14:50. > :14:52.man who, think I, already contributes to 20% of Chile's
:14:52. > :14:57.electricity project. They are saying that this is not the country
:14:57. > :15:01.to do business in. They should look at doing business, you know,
:15:01. > :15:06.reports of the World Bank, it is very high. And the investments that
:15:06. > :15:10.are going into the country - of course, I mean, I understand that
:15:10. > :15:14.he must be not satisfied that the Supreme Court blocked, but we do
:15:14. > :15:17.have institutions that we must respect in Chile. There are ways in
:15:17. > :15:23.which he can continue this investors and others, with the
:15:23. > :15:27.project he needs to do a new environmental study.
:15:27. > :15:33.And reapply. Whether he wants or not, that is his own decision. But
:15:33. > :15:37.we are - I tell you, everything can go smoother, you know, you can
:15:37. > :15:47.always think we can do better. Yes, we can do better. But we need to
:15:47. > :15:49.
:15:49. > :15:56.One other area you might describe as a self-inflicted problem for
:15:56. > :16:01.Chile is education. We have had now 16 months of protests over the high
:16:01. > :16:06.cost of being educated. The government wouldn't meet protesters
:16:06. > :16:11.for the first six months. Why was that? Yes, we had protests in the
:16:11. > :16:17.streetment what they are saying, we agree. We agree we need to increase
:16:17. > :16:22.the quality of education and the cost of loans we inherited from the
:16:22. > :16:28.previous government was too high. 5.6%. We just had approved in
:16:28. > :16:33.Congress a bill that reduces that cost from 5.6 to 2%. So in effect
:16:33. > :16:36.we are subsidising people to study. For a 2% loan, they are not
:16:36. > :16:40.available on the market. The government has to find the
:16:40. > :16:47.difference between the 2% and the market rate. We already have that.
:16:47. > :16:56.Society is growing. We have reached 19,000 dollars per capita in
:16:56. > :17:02.purchasing power party - parity terms. There is a middle income
:17:02. > :17:06.trap. We don't want to get in the middle income trap. Some people get
:17:07. > :17:11.anxious and want the benefits now. But as a government we have to be
:17:11. > :17:16.responsible and say we can't have everything now. Indeed your
:17:16. > :17:21.President says nothing in life is free. Someone has to pay. But who
:17:21. > :17:24.pays? At the moment in Chile the burden of the cost of education
:17:24. > :17:28.seems to be borne disproportionately by people
:17:28. > :17:35.themselves, by families and households, not by the state or
:17:35. > :17:39.indeed wealthyer taxpayers. In the EOCD of which you became a member
:17:39. > :17:44.recently, the average state sending 17% of the cost on higher education.
:17:44. > :17:47.This Chile it's 16%. That's a big difference. What is it about
:17:47. > :17:50.Chile's attitude to higher education that's so different?
:17:50. > :17:55.Firstly, there has been a tremendous increase in the coverage,
:17:55. > :18:00.in the amount of people that could go to higher education. A decade
:18:00. > :18:05.ago huh? 150,000 people going into higher education. Now you have a
:18:05. > :18:09.million people. That expanded in a way that now 70% of those people
:18:09. > :18:13.are first generation in higher education. So we're having a
:18:13. > :18:19.tremendous social change in Chile. People who didn't have access now
:18:19. > :18:26.have access. But in terms of our public budget, the biggest budget
:18:26. > :18:30.of all ministrys is education, 12 billion out of 60 billion. 12 per
:18:31. > :18:34.cent, one pound out of every five we spend as a government goes into
:18:34. > :18:39.education. There are people who say that's as it should be because it's
:18:39. > :18:42.a common good, not just a thing to make people happier and more
:18:42. > :18:46.engaged with the world around them but also something that helps your
:18:46. > :18:50.economy, which is what you need to develop. That's what we're doing.
:18:50. > :18:54.We received a budget short of $9 billion. Over three years we have
:18:54. > :19:03.increased it to $12 billion. Education was not the highest
:19:03. > :19:08.spending item. Now it is. Why? 60 months of protests. Children
:19:08. > :19:11.barricading themselves into schools and not letting teachers in. It's
:19:12. > :19:15.not just higher education but secondary education too. And also
:19:15. > :19:19.preschool education. We need to consider the people in the streets
:19:19. > :19:24.but also those not in the streets. The young children are not in the
:19:24. > :19:29.streets. We are doing 60% of the most vulnerable part of the Chile -
:19:29. > :19:33.they will have universal coverage, free education, for the 60% most in
:19:33. > :19:36.need. This is what we're doing. It's not because they are in the
:19:36. > :19:41.streets, it's because that we believe this order to give people a
:19:41. > :19:45.fair chance they need intervention N education, access to education at
:19:46. > :19:49.the beginning. All studies say you need to give people at the very
:19:49. > :19:55.gining in preschool and kindgar ten and even before in nurserys, you
:19:55. > :20:00.need to have a scheme that allows them to get a good start. You have
:20:00. > :20:06.put up taxes to help pay for this? That's right. The corporate tax
:20:06. > :20:10.rate up to 20%. It was 18.5%. So it's not a great increase. What has
:20:10. > :20:15.been the reaction from business and industry to this higher tax? When
:20:15. > :20:19.you told them it is to pay for education? Firstly, we are a centre
:20:19. > :20:23.right government, as you know. But we have done tax reform to increase
:20:23. > :20:30.net revenue for education. You're right it's 18.5. But it was going
:20:30. > :20:34.to go down to 17. So really the increase is from 17 to 20 - three
:20:34. > :20:40.points. At the same time we have reduced taxes on people. Personal
:20:40. > :20:48.income tax has been reduced. Corporate income tax was increased.
:20:48. > :20:54.We are also reducing the tax on loans from 1.2% to 0.4% on loans.
:20:54. > :20:59.So we are getting the reaction from industry and business people - it's
:20:59. > :21:04.that they understand that we need to do a bigger effort for education.
:21:04. > :21:08.So nobody really wants to pay more taxes, but they have been
:21:08. > :21:12.understanding. Our economy keeps growing, investment keeps growing.
:21:12. > :21:15.We are seeing a good response from them. Is it down to you as a
:21:15. > :21:19.government to make the case to business and industry. You said
:21:19. > :21:24.they are not happy to pay more tax but that they accept they have to
:21:25. > :21:27.pay it. Stkpwhru But that this is about their future. Global
:21:27. > :21:33.competitiveness, the report for this year, says about Chile that
:21:33. > :21:40.the lack of quality education is preventing your country making the
:21:40. > :21:43.next step in its development. Low quality scientific educations -
:21:43. > :21:46.institutions and poor quality education hinder the capacity to
:21:46. > :21:52.generate and use knowledge that could be brought into the market in
:21:52. > :21:57.the new - in the shape of new products or services. I had to
:21:57. > :22:03.comment on that in terms of the rankings. The worst ranking we get
:22:03. > :22:09.is in primary education. Quality of primary education, we get a 74. 74
:22:09. > :22:14.in the ranking. Precisely this is why we are doing this tax reform.
:22:15. > :22:20.Let me tell you what we are doing the tax reform for. Preschool
:22:20. > :22:23.education - 60% of the most vulnerable will get it for free.
:22:23. > :22:28.Primary and secondary school education - we will increase the
:22:28. > :22:34.subsidy of the state so we can increase the resources of those
:22:34. > :22:39.schools. For higher education, grants for 60% most vulnerable,
:22:39. > :22:43.with 2% rates for the rest. Do you think that perhaps this might
:22:43. > :22:48.explain the problems with education, the persistence of inequality in
:22:48. > :22:53.Chile? First of all, Latin America is the region with the highest
:22:53. > :23:00.income inequality in the world. It's not the poorest region. The
:23:00. > :23:05.poorest region is Africa. Africa has leapt in equality. Within Latin
:23:05. > :23:08.America Chile is average, not the highest, not the lowest. We have
:23:08. > :23:13.had more progress in reducing poverty than reducing inequality.
:23:13. > :23:17.This is one of the challenges. So how do we do it? Firstly, jobs,
:23:17. > :23:21.jobs to people who are most in need, poor people, they can maintain
:23:21. > :23:26.those jobs. That's one. Secondly, education. Training programs. Those
:23:26. > :23:32.are the main way this is which we can reduce inequality but we can
:23:33. > :23:36.only do it gradually. This is a key question. How do you do that? Could
:23:36. > :23:41.it than education will be the way that helps you diversify the
:23:41. > :23:49.economy? Helps you get that soft landing? Helps you move again back
:23:49. > :23:52.up and recover? Absolutely. Education - the only thing you have
:23:52. > :23:56.to consider is that education n order to give the returns on
:23:56. > :24:05.education, it will take time. But we need to do it and we are doing
:24:05. > :24:11.it. Yes, Chile depends on copper, it's over half our exports. But
:24:11. > :24:14.there are some interesting areas like services, remote services,